Types of Mortgage
FIXED RATE MORTGAGE
A fixed rate mortgage is simply a means of guaranteeing your mortgage payment over a set period.
Fixed rates are for an initial period, typically anything from one to ten years. After the fixed rate period ends, your mortgage will go onto a variable rate – normally a tracker rate or your lender's Standard Variable Rate - which won't give you the same kind of guarantee.
During the fixed rate period your payments will remain the same, regardless of what variable mortgage interest rates do or movements of the UK base rate. So, while you're protected if rates go up, you could also end up paying over the odds if interest rates fall during the fixed rate period.
Fixed rate mortgages also normally have an Early Repayment Charge if you want to re-mortgage or repay your mortgage in full during the initial fixed rate period. That said, most fixed rate mortgages will allow you to make overpayments, typically up to 10% of the outstanding balance per year.
The longer the rate is fixed the higher it will tend to be. The more popular terms are two or five year fixed products.
DISCOUNTED RATE MORTGAGE
Discounted variable rate mortgages offer a discount on a certain interest rate, most commonly a lender's Standard Variable Rate. The discount can be for an introductory term of two, three or five years, or it could even be for the entire term of the mortgage (a lifetime discounted rate).
A discounted rate is a type of variable interest rate – so your payments can go up and down. They work by offering a set discount on a lender's standard variable rate, usually measured as a percentage of the rate.
When your introductory period comes to an end, you will most likely go onto your lender's Standard Variable Rate properly.
Discounted rates tend to come with an Early Repayment Charge, if you pay off the mortgage early or re-mortgage to another lender during the introductory period. However, most will let you make overpayments – normally up to 10% of the outstanding balance per year.
Tracker mortgages are basically a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow – track – movements of another rate. Most commonly, the rate that is tracked is the Bank of England Base Rate.
Tracker rates do not match the rates they track but are at a 'margin' above that rate. Introductory offers tend to have a lower margin, for example Base Rate plus 1.00%. So, with base rate at 0.5%, the rate paid would be 1.50%.
Longer-term tracker mortgages would have a larger margin, for example base rate plus 3.5%. Tracker rates can be for an introductory period (typically anything from one year to five years), or you can get a lifetime tracker, which means that you'll be on it for the whole term of your mortgage.
It's become more common for some mortgage lenders to put a collar rate on their tracker mortgages. A collar rate basically means that your rate can't go below a certain minimum level. So, if the rate being tracked goes below the collar rate, your payments won't go down any further.
Offset mortgages can be a great way to save money. They can either help you reduce your monthly payments, or shorten the term and help you get mortgage-free sooner.
Offset mortgages are a type of product that let you link your mortgage to your savings.
The savings balance is used to reduce the amount of interest charged on the mortgage. Your savings will be "offset" against the value of your mortgage, and you'll only pay interest on your mortgage balance minus your savings balance. Your savings don't actually repay any of your mortgage, they just sit alongside it and save you interest.
With your offset mortgage, you can choose how to benefit from the interest you save:
Lower monthly payments - your mortgage term remains the same but you pay back less each month or
A shorter term - keep your payments the same and you will actually shorten the term of your mortgage saving yourself interest.